Basel Committee issues consultative document on sound credit risk assessment and valuation for loans

The Basel Committee on Banking Supervision today issued for public comment guidance for banks and supervisors on sound credit risk assessment and valuation policies and practices for loans.

Sound Credit Risk Assessment and Valuation for Loans will replace the sound practices paper for loan accounting and disclosure published by the Committee in July 1999. The paper addresses how common data and processes may be used for credit risk assessment, accounting and capital adequacy purposes. It also highlights provisioning concepts that are intended to be consistent with prudential and accounting frameworks.

The practices presented here address necessary processes for banks in sound credit risk assessment, valuation and control, and the responsibilities of the board of directors and senior management for maintaining adequate loan loss provisions. The paper also provides guidelines on how supervisors should evaluate the effectiveness of a bank's credit risk policies and practices when assessing the adequacy of their credit risk assessment process and regulatory capital.

Mr Jaime Caruana, Chairman of the Basel Committee and Governor of the Bank of Spain, said today, "Sound credit risk assessment and valuation processes are essential if banks are to recognise deterioration in credit quality in an adequate and timely manner. Such sound processes will promote more meaningful capital requirements and stability in financial markets."

Professor Arnold Schilder, member of the Basel Committee, Chairman of its Accounting Task Force and Executive Director at the Netherlands Bank, remarked "Although the extent to which banks will implement the practices set out in this paper may be different, depending on their operations, this paper is relevant to all banks. Looking forward, the practices set out are relevant regardless of the approach used in the calculation of credit risk regulatory capital requirements or the accounting framework applied."

Comments are invited by 28 February 2006 and should be addressed to:

Basel Committee on Banking Supervision
Bank for International Settlements
Centralbahnplatz 2
CH-4002 Basel
Switzerland

Alternatively, comments may be sent via e-mail to baselcommittee@bis.org. (Please use this e-mail address only for submitting comments and not for correspondence).